Commonwealth Independent Advisor

What the CARES Act Means for Small Business Owners

Posted by Maureen Baxter, CLU, ChFC

April 8, 2020 at 11:00 AM

CARES ActAs small business owners, it’s likely that you and some of your clients have been adversely affected by the coronavirus crisis. Fortunately, help is on the way. On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) into law. It includes several key provisions designed to help small businesses retain their employees and pay expenses during this difficult time.

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The Paycheck Protection Program

Eligibility considerations. One of the major provisions of the CARES Act is the Paycheck Protection Program (PPP), which will be administered by the Small Business Administration (SBA) as part of its 7(a) lending program. Under the PPP, small businesses may be eligible for federal government-backed small business loans. They are nonrecourse loans (when used to pay for qualified expenses), and there is no requirement for collateral or personal guarantees.

When considering your eligibility or that of your clients, here are some important criteria to keep in mind: 

  • Small businesses (i.e., businesses employing 500 or fewer employees or, if applicable, the industry-specific standard set by the administration), nonprofits, veterans’ organizations, sole proprietors, self-employed individuals, and independent contractors who meet the applicable size standards can receive assistance.
  • Food service employers with 500 or fewer employees per physical location are also eligible.
  • The coverage period is from February 15, 2020, to June 30, 2020.
  • To be eligible, businesses must have been in existence on February 15, 2020.

General application requirements. Once you have determined eligibility, the next step is to apply. To qualify for a PPP loan under the SBA, you don’t need to demonstrate specific economic damage related to COVID-19. But you will be asked to complete a Good Faith Certification attesting that there is a need for this loan due to the continuing economic uncertainty as a result of the pandemic. Specifically, you will be asked to certify the following:

  • That the loan is necessary to support ongoing business operations
  • That the loan will be used to retain employees and cover qualified expenses
  • That the applicant is not receiving other PPP loan assistance

Authorized banks will have their own application processes based on the SBA-provided template. Each business is also limited to one PPP loan. You may be eligible for a separate Economic Injury Disaster Loan through the SBA (more on that below).

Loan terms. PPP loans will have a two-year term with an interest rate of 1 percent. Payments may be deferred for six months, but interest will accrue during that time.

Initially, the CARES Act declared that the interest rate was not to exceed 4 percent, the loan term would be for a maximum of 10 years, and payments could be deferred for 6 to 12 months. But the SBA issued “interim final rules” on April 2, 2020, stating that the secretary of the treasury and the SBA were applying the terms discussed above to PPP loans.

Maximum loan amount. Businesses are eligible for an amount equal to the lesser of 2.5 times their monthly payroll costs or $10 million. The eligible amount is based on the average monthly payroll costs incurred during the one-year period before the loan origination date. (For new businesses, this period is from January 1, 2020, to February 29, 2020.)

  • Monthly payroll costs include wages, salaries, retirement contributions, health care premiums, and state and local taxes assessed on compensation.
  • Payroll costs are capped at $100,000 on an annualized basis for each employee.
  • There are specific rules for seasonal employers.

Loan forgiveness. A portion of the PPP loan may be eligible for forgiveness. This amount is equal to specific qualified expenses incurred during the eight-week period following the loan origination date.

  • Qualified expenses include payroll costs, as well as mortgage interest, rent, and utility payments on contracted services that existed prior to February 15, 2020.
  • The amount of the loan that is forgiven is not subject to income tax.
  • The total amount of loan forgiveness for this period cannot exceed the amount of the loan.
  • The SBA’s “interim final rules” state that a maximum of 25 percent of nonpayroll expenses (e.g., mortgage interest, rent, utilities) can be forgiven.

Here, it’s important to note that a key goal of the plan is to retain employees. As such, if an employer reduces the average number of employees or if there is a reduction in salaries and wages in excess of 25 percent (for those employees making less than $100,000 annualized in 2019), there will be a proportional reduction in the amount of loan forgiveness. Borrowers have until June 30, 2020, to restore loan forgiveness eligibility for employment or salary-level reductions made between February 15, 2020, and April 26, 2020.

Details on required documents to apply for loan forgiveness are forthcoming. In order to best prepare, you may want to put the loan amount in a separate business account, where you can then track and pay expenses.

Economic Injury Disaster Loans

The CARES Act has also increased the amount and the accessibility of SBA Economic Injury Disaster Loans (EIDLs). EIDL eligibility has been expanded to include employee stock ownership plans and sole proprietor-owned businesses. Loan availability has also been expanded to include employers with 500 or fewer employees during the period from January 31, 2020, through December 31, 2020. Further, the personal guarantee requirement has been waived for loans below $200,000.

Under this program, borrowers can receive an emergency advance grant of $10,000. This advance will be forgiven if used for the qualified expenses outlined in the program.

Refinancing EIDLs. If you took an EIDL prior to the enactment of the PPP, you can refinance the loan to a PPP loan in order to take advantage of loan forgiveness. Any $10,000 emergency grant received under the EIDL program will be netted from the total loan forgiveness.

Where Can You Apply?

Many FDIC banks were authorized by the SBA to process PPP applications beginning April 3, 2020. But due to the confusion and delay surrounding the rules of the program, some banks may need more time before they can start offering the loans.

If you’re looking for specific information, reach out to the banks where you do business. Also, the SBA offers information and resources for PPP loans and EIDLs on its website. You can apply online via the SBA’s website for the separate EIDL.

Of course, this situation is still unfolding. To ensure that you’re getting all the help that’s available, be on the lookout for further guidance from the Treasury, IRS, and SBA in the coming weeks.

What resources are you using to help your small business owner clients? Have they come to you with questions on the PPP? Please share your thoughts with us below.

Commonwealth Financial Network® does not provide legal or tax advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

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